Part 3 Report on performance

Overview

The Commission's performance report is based on an assessment of its results for the year using a range of criteria. Three sets of criteria have been adopted by the Commission to enable a thorough assessment of all aspects of its operations. Broadly, the criteria encompass:

how well the object of the Act has been met by the Commission's decision making;

how fair and effective the Commission has been in dealing with applicants and interested parties; and

how efficient the Commission has been in the use of financial resources available to it.

The Commission's assessment of its performance against each of these criteria is set out below.

Results against performance targets

Serving the object of the Act

The object of the Act is to enhance the welfare of Australians by promoting economic efficiency through competition in the provision of international air services. Under the Act, the Commission’s functions are to make determinations; review determinations; and provide advice to the Minister about any matter referred to the Commission by the Minister concerning international air operations. In fulfilling its functions, the Act requires the Commission to comply with policy statements made by the Minister under section 11 and to have regard to Australia’s international obligations concerning the operation of international air services.

The Commission records annually the number of determinations and decisions (involving reviews and variations of determinations) made for the year. The volume of activity varies from year to year. The dominant factor underlying the Commission’s output is the number of applications made by airlines. The demand for new capacity from the Commission is directly related to the level of demand for air services. In turn, international aviation activity is particularly sensitive to factors such as changes in the strength of the economy and the emergence of security threats, among others.

In the financial year 2017–18, the Commission issued nine determinations allocating new capacity; 21 renewal of capacity allocations; 30 decisions varying various determinations including a couple of resolutions extending the date of utilisation of the capacity; and one revocation of capacity allocation. A contested application for variation of two determinations on the PNG route was subsequently withdrawn by the applicant (Qantas) following the Commission’s release for public consultation of its draft decisions on the matter.

The graph below shows a comparative data of the current reporting period (2017–18) with the three preceding years.

Historical numbers of determinations and decisions

In 2017–18, nine determinations allocating new capacity were made. The allocations reflected the expansion of overseas services by the Australian carriers.

Virgin Australia sought and was issued a new capacity allocation of 156 seats per week on the Cook Islands route which enabled Virgin to operate one additional weekly service during peak periods in 2018. Virgin Australia also applied and was granted a new capacity allocation of seven frequencies on the Hong Kong route enabling Virgin to operate daily services from Sydney to Hong Kong to supplement its existing daily Melbourne–Hong Kong service. Virgin’s Sydney-Hong Kong services commenced from 2 July 2018. Virgin Australia also sought and was issued 300 seats per week for code sharing with third country airlines on the Italy route, bringing its total capacity allocation on the route to 600 seats which it uses to code share with Etihad and Singapore Airlines. Virgin Australia also sought and was issued an additional capacity of 242 seats on the Fiji route following the Australian government’s successful negotiations with the Fijian authorities in May 2017 for additional capacity entitlements on the route. This brings Virgin Australia’s total allocation on the Fiji route to 4,389 weekly seats. Finally, Virgin Australia applied for and was issued a new capacity allocation of 880 seats on the Samoa route enabling Virgin to operate services between Australia and Samoa from 14 November 2017.

Qantas, on the other hand, applied for and was issued 258 seats per week on the Fiji route to enable its wholly-owned subsidiary, Jetstar, to operate two additional weekly services on the route from December 2018–January 2019. Qantas also sought and was issued a total capacity allocation of 2,560 seats on the Indonesia route, bringing its total capacity allocation on the route to 17,128 seats for the exercise of third and fourth freedom rights. Qantas also applied for and was granted 300 third country code share seats on the Italy route, bringing its total capacity allocation on the route to 1,000 seats for the provision of code share services with Emirates and British Airways.

During the reporting period, the Commission issued 21 renewal determinations. Qantas renewed its capacity allocations on the following routes:

China renewing unrestricted freight capacity;

Indonesia renewing 14,468 seats per week for the exercise of third and fourth freedom rights and 2,148 seats for the exercise of beyond traffic rights with 12 frequencies per week, seven of which may be used beyond Indonesia from Denpasar;

Italy renewing 300 third country code share seats;

Singapore renewing unlimited capacity and frequency for services other than all-cargo services; and

Thailand renewing unlimited freight capacity.

Virgin Australia applied for and was issued renewal determinations on the following routes:

Indonesia renewing multiple determinations allocating a total capacity allocation of 5,040 weekly seats to operate services to and from Sydney, Melbourne (including Avalon), Brisbane and Perth but the allocation was subsequently reduced by 1,288 weekly seats, effectively renewing in FY 2017–18 a total capacity allocation of 3,752 weekly seats;

Indonesia renewing unrestricted capacity19 to operate services between points in Australia, other than Sydney, Melbourne (including Avalon), Brisbane and Perth and authorised points in Indonesia;

Korea (South) renewing 1,000 seats of capacity;

New Zealand renewing unlimited passenger and freight capacity;

Papua New Guinea renewing 160 seats of capacity;

Tonga renewing 180 seats of capacity;

United States of America renewing unlimited passenger and freight capacity; and

Vanuatu renewing two determinations allocating a total capacity of 900 seats.

Pacific Air Express, which currently holds capacity allocations on the Vanuatu, Papua New Guinea, Nauru and China routes for the operation of all-cargo services on these routes, sought and was granted authorisation to extend the date of its utilisation on the China route to 31 March 2019.

Norfolk Island Airlines, which was issued unlimited passenger capacity on the New Zealand route on 10 February 2017 was not able to commence its planned scheduled services between Norfolk Island and Auckland in FY 2017–18.

Qantas ceased operating its own services to the United Arab Emirates and as a result sought a revocation of its determination on the route.

As in previous reporting periods, an area of significant work for the Commission is assessing applications by the airlines to use their allocated capacity for code sharing with another carrier.

During the reporting period, the Commission authorised Qantas to code share with:

Air France on the France route;

Air France, El Al and LATAM Airlines on the Hong Kong route;

British Airways on the Italy route;

China Airlines and SriLankan Airlines on the New Zealand route;

Air France and LATAM Airlines on the Singapore route; and

El Al Airlines on the South Africa and Thailand routes.

The Commission also authorised Qantas’ wholly-owned subsidiary, Jetstar, to code share with Japan Airlines on the Japan route.

In relation to Virgin Australia, the Commission authorised the airline to code share with:

Virgin Atlantic on the Hong Kong and the USA routes; and

Hainan Airlines on the New Zealand route.

A brief summary of all determinations and decisions for 2016–2017 is at Appendix 1. A detailed description of each case is provided at Appendix 2.

The Commission's full determinations in these cases are available from its website, iasc.gov.au.

19 Renewal Determination [2018] IASC 108 was the first determination issued under the 2018 Policy Statement to be given a period of validity of 99 years. Under the 2018 Policy Statement, where the air services arrangements provide for unrestricted capacity entitlements, the period of validity of the determination is to be fixed at 99 years.

Case Study—Minister's Policy Statement 2018

Introduction

In its annual report each year, the Commission includes a discussion, usually a case study that deals with one of the Commission’s more complex cases to provide an insight into how it assesses contested or more contentious applications. For this year, the Commission has decided to focus on the recently issued International Air Services Commission Policy Statement 2018 made by the Hon. Michael McCormack MP, Deputy Prime Minister and Minister for Infrastructure and Transport, which came into effect on 28 March 2018.

The 2018 Policy Statement

The 2018 policy statement repeals and replaces the policy statement issued and in force since 2004. The new policy statement brings several benefits, including the clarification of certain provisions and a reduction of cross-referencing. These changes are intended to streamline the Commission’s decision-making process and provide greater transparency and certainty to Australian carriers. The new policy statement contains an explanatory outline at the beginning of each part to aid understanding and interpretation.

Object

The new policy statement sets out clearly that the object of the instrument is to provide guidance to the Commission in the performance of its functions. The object makes clear that the Commission is to perform its functions in a way that will achieve the object of the Act. That is, the Commission is directed to promote economic efficiency through competition in the provision of international air services by fostering, encouraging and supporting competition in the provision of international air services by Australian carriers. The statement highlights competition as a pre-eminent consideration in the Commission’s decision-making process.

Criteria for assessing public benefit

The new policy statement again contains the two sets of criteria for assessing the benefit to the public of an application. These are the ‘reasonable capability criterion’ under section 8 and the additional criteria under section 9.

Under the ‘reasonable capability criterion’, the Commission is tasked to assess the extent to which all Australian carriers that are, or would be, permitted to use the capacity allocated are reasonably capable of obtaining any licences, permits or other approvals required to operate on a particular route, and of then using the capacity allocated under the determination. The new policy statement makes it clear that this criterion applies to all Australian carriers. That is, the criterion applies to both the carrier that is the primary holder of the capacity allocation and is (or would be) permitted to use the capacity, or a wholly-owned subsidiary of that airline. This clarifies under which circumstances, and to which carriers, the ‘reasonable capability criterion’ would apply.

The new policy statement also makes it clear that the Commission will apply the ‘reasonable capacity criterion’ in assessing all applications received – whether for allocation of new capacity, variation of an existing determination or the renewal of a determination.

The additional criteria that the Commission may apply in assessing an application include competition benefits, tourism and trade benefits, relevant information obtained from government agencies and any other matter or consideration that the Commission considers to be relevant. These are slightly changed from paragraph 5 of the previous policy statement, and are now found in section 9 of the new document.

As with the 2004 policy statement, the new policy statement identifies the factors that are to be considered by the Commission under the ‘competition criteria’, with the addition of the following:

any determination, decisions or notifications made by a foreign agency performing a comparable function as the Australian Competition and Consumer Commission (ACCC), the Australian Competition Tribunal or by a foreign aeronautical authority in relation to a carrier using entitlements under a bilateral arrangement; and

any information that the Commission has obtained from other Australian government agencies or statutory authorities.The new policy statement retains the preference for capacity to be used by Australian carriers operating their own aircraft, rather than for marketing code shares on fights operated by foreign carriers20.

Clarity of criteria to apply

The Commission considers that a significant improvement in the new policy statement is that it brings greater clarity to the decision on which criteria the Commission is expected to apply in certain circumstances.

Division 2 sets out the criteria to be applied by the Commission in assessing the benefit to the public of a proposed allocation of new capacity under section 7 of the Act.

Division 3 sets out the criteria when the Commission assesses an application for renewal of a determination.

Division 4 provides for the criteria when assessing an application for a variation of an existing determination.

Allocation of new capacity

Where there is unlimited capacity on the route or where there is sufficient available capacity to make the determinations sought by competing applicants on a route that has limited capacity but there is no opposing submission, only the ‘reasonable capability criterion’ is expected to be applied by the Commission. In all other cases, the Commission may also apply any of the additional criteria it considers to be relevant.

Renewal of determination

In assessing an application for renewal of a determination, the Commission is no longer required to establish in the first instance if the route is in the ‘start-up phase’. In a renewal application, section 14 of the new policy statement affirms the presumption in favour of making the same allocation of capacity to an incumbent carrier as provided under section 8 of the Act. The Commission, however, may refuse to renew an allocation of capacity if it is satisfied that the allocation is no longer of benefit to the public. Where the Commission is considering that the allocation in the original determination is no longer of benefit to the public, the Commission may have regard to a non-exhaustive list, which includes, whether:

a) the carrier seeking renewal has failed to service the route effectively; andb) there are other applications for some or all of the capacity; andc) the Commission having regard to the reasonable capability criterion and any of the additional criteria that it considers relevant, is satisfied that a different allocation of the capacity would be of greater benefit to the public.

Should the Commission be satisfied that allocating the same capacity as the original determination is no longer of benefit to the public, in making a different allocation of capacity, the Commission is expected to apply the reasonable capability criterion in section 8, and any of the additional criteria in section 9 that it considers to be relevant.

Review to vary a determination

The new policy statement clearly distinguishes between the public benefit criteria to be applied for (a) a review due to a transfer application; and (b) a review due to an application other than a transfer application.

If a review stems from an application other than a transfer application, only the ‘reasonable capability criterion’ will be applied if there are no submissions opposing the variation requested. In all other cases (e.g. a submission is received), the Commission is to have regard to the ‘reasonable capability criterion’ and may have regard to any of the additional criteria in section 9 that it considers to be relevant.

For all transfer applications21, whether or not a submission is received, the Commission is expected to apply the reasonable capability criterion and has the discretion to apply any of the additional criteria in section 9 of the new policy statement that it considers to be relevant.

A majority of the applications for variation of a determination seek the Commission’s authorisation to use the allocated capacity for code sharing, joint services or other types of cooperative marketing arrangements with another carrier and as such are transfer applications.

Should the Commission authorise the use of the capacity for joint services (including code sharing), as with paragraph 3.7 of the 2004 policy statement, section 23 of the new policy statement requires the Commission to include a condition requiring the Australian carrier to take reasonable steps to ensure that passengers are informed at the time of booking that one or more other carriers may operate the fight.

If the Commission has initiated a review of a determination on the basis that the carrier has failed to fully utilise the capacity allocation, the Commission may have regard to the criteria in subsection 24(3) which include consideration of whether: (a) there is an application from another carrier for capacity on the route and the unused capacity under review prevents the making of a determination in favour of the competing applicant; (b) there is a seasonal variation in demand on the route in question; (c) the carrier was prevented from fully using the capacity by circumstances not reasonably foreseen; and (d) any other matter that the Commission considers to be relevant.

Schedule 1

Schedule 1 repeals the 2004 policy statement.

Application and transitional provisions

Part 6 of the new policy statement deals with application and transitional provisions.

Any application for allocation of capacity, renewal or variation of a determination received on or after the commencement of the 2018 policy statement on 28 March 2018, will be assessed under the 2018 policy statement.

However, the Commission is to apply the 2004 policy statement when assessing an application received before the commencement of the 2018 Policy Statement (as if the 2004 policy statement had not been repealed).

In conclusion

The new policy statement gives the Commission a refreshed document with greater clarity. This is particularly valuable in an environment where codeshares, joint ventures, and wholly owned subsidiaries are playing a greater role in the marketing and delivery of airline services to Australians.

20 See paragraph 3.3 of the 2004 policy statement and subsection 9(d) of the 2018 policy statement

21 A transfer application is defined in section 4 of the Act as an application for one or both of the following: (a) a variation of the determination in a way that allocates, or has the effect of allocating that capacity to another Australian carrier; (b) a variation of the determination that varies, or has the effect of varying, one or more conditions of a kind referred to in paragraph 15(2)(d), (e) or (f)

Serving applicants and interested parties

The Commission uses the detailed commitments set out in its service charter as the framework for assessing its service performance. The specific undertakings in the service charter encompass both the ways in which the Commission engages with interested parties and how it makes its decisions. This framework provides the basis for an objective assessment of the Commission’s performance.

Again this year, clients were invited to assess the Commission’s performance by completing an electronic questionnaire. The questions allow respondents to evaluate how well the Commission performed against each of the specific undertakings set out in the charter. Questionnaire responses may be made anonymously, although some of those responding chose to disclose their identity. The Commission very much appreciates the effort made by respondents to provide their views on the Commission’s performance.

Each year, respondent scores against each criterion are aggregated and averaged. For 2017–18, the Commission’s over-all performance was rated above average, which indicates that stakeholders continue to rate the Commission’s performance favourably.

The following charts summarise the feedback from stakeholders of the Commission's service performance during the year:

Dealings with stakeholders—Do you agree that we:

Decision making process—Do you agree that we:

The Commission also records the time taken to make each of its decisions, as it considers timeliness to be a particularly important performance benchmark.

One of the commitments in the service charter is that the Commission will make decisions about uncontested and unopposed applications within four weeks of receipt. In relation to contested or opposed applications, the Commission will make decisions within 12 weeks, or inform the airline/s involved if there are reasons why a decision may take longer than this.

Except for one case concerning code sharing on the Papua New Guinea route, the applications received during the reporting period were uncontested and unopposed. The Commission generally dealt with these straightforward applications within the four-week period. However, decisions on seven applications were delayed to align with the scheduling of Commission meetings.

The Qantas’ application to vary two determinations on the Papua New Guinea route to allow the capacity to be used for code sharing with Air Niugini was opposed by Virgin Australia and generated submissions from various stakeholders. The Commission issued draft decisions for public consultation within the 12-week timeframe for making decisions on opposed matters as set out in the service charter.

Three applications (Qantas on the Fiji and Italy routes; Virgin Australia on the New Zealand route) took between 10 to 19 weeks to complete as the Commission had to await information and documentation from the applicant carriers before decisions could be made.

Detailed information about the Commission’s timeliness performance is contained in the following chart.

Distribution of decision times by type of case

Efficiency of financial resources

The Commission’s budget for the year was $435,000. These funds were made available from the resources of the Aviation and Airports Division of the Department. The Commission’s budget expenditure is mostly attributable to the salaries and superannuation of Secretariat staff and fees paid to Commission members including superannuation. Other expenditures include the Commissioners’ expenses in connection with their travel to Canberra to attend meetings and the production of the annual report. Most corporate overheads and property operating expenditures are paid for by the Department, as the Commission is housed in a departmental building.

The Commission’s total expenditure for 2017–18 was within the Commission’s budget.

The Commission considers the expenditures to have been made efficiently and effectively. The Commission has delivered steady efficiency gains over a long period. During the year, officers from the Department provided administrative support to the Commission. One external officer was temporarily seconded to the Secretariat as Acting Executive Director when the incumbent was on leave.